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The RCM provisions make it incumbent upon the ‘recipient’ of goods or services to discharge the tax liability, instead of the regulation supplier/vendor.

While we are well versed with the provisions of S.9(3) and 9(4) of the CGST Act, 2017 as also S.5(3) and 5(4) of the IGST Act,2017, it is worthwhile to trace the origins of this ingenious concept introduced by the taxing authorities, which was though of to curb the menace of ‘MTIC’ (Missing Trader Intra-Community) or ‘Carousel’ frauds.

Understanding the purpose and the need, greatly succors the appreciation of law.

Brief history of emergence of VAT as a concept:

Value Addition Tax (VAT) i.e. tax only on the value addition in a sequential manufacturing process, was conceptualized in early 20th Century by American and German thinkers. A German Businessman viz. WV Siemens and an American Economist viz. Thomas S Adams first thought of this concept to curb the cascading effect of indirect taxes, and which aimed at an efficient system based on consumption at the destination.

So effectively VAT moves from manufacturer towards the final customer like an outward ripple in a pond, increasing in amplitude as the stages of production progress. The “wave finally breaks at the shore and drenches the kid”, and the taxes so add-up and move forward towards the customer who finally pays it all up.

VAT regime took hold in two broad phases in Latin America and Europe.

The first phase was from 1967-1980, when VAT was implemented by few Western European and Latin American countries.

The Second phase from 1980s saw widescale adoption of VAT system by reputed rich heavyweight economies such as Australia, Canada, Switzerland, Japan etc, and also some Third World Economies of Asia and Africa.

The IMF (International Monetary Fund), EEC (European Economic Community- a precursor to the present EU) and the World Bank, played an instrumental role in nudging world economies to adopt this system. Present European Union (The EU) makes it necessary for member countries to adopt and implement VAT regime for being and remaining a part of the Union.

France was the first country to adopt a thin version of VAT in 1954, i.e. it wasn’t a full scale VAT that reached upto the retail customer, but only some processes in the chain of manufacture were covered. It wasn’t until 1968 that France included Retail sector too in VAT system.

Denmark was probably the first country which implemented a full scale VAT system reaching the retail as well, applying a standard rate to goods, in the year 1967.

Importance of RCM:-

It wasn’t before losing billions of Euros, that the EU realized the ingenuity of fraudsters whose understanding of the VAT far exceeded that of the Law makers, as has always been seen in all legislations. The very system that ensured transparency and efficiency was turned against the taxman by cartels operating inter-country within the EU.

Destination based taxation and Carousel Fraud (or MTIC):

Under VAT the tax travels with the goods and gets transferred, except in the case of Exports, such that the taxes are not to be exported along with the goods or services. This laid the foundation of Destination Base concept in VAT.

Destination-base mandates that the exporting country cannot charge VAT on its exports so that the destination of consumption (i.e. the Importer country, where the goods shall be consumed) charges its own VAT on the last sale to a consumer.

This concept ensures that all firms- domestic as well as international- have a level competition as to price for similar goods in the destination country, when it comes to sales in a particular jurisdiction.

Origin base taxation on the other hand, ensures that the consumers in different countries/jurisdictions are on a level playing field.

Scamsters were aware that Exports have to be zero rated, since taxation under VAT is ‘Destination Based Tax’ (DBT). The concept of DBT, while ensuring fairness of competition to all the producers located outside a jurisdiction, worked in favor of scamsters.

The mechanism was simple.

1. A vendor-exporter, Mr. X in a country A exported goods (mostly electronic goods viz. Mobile phones or microchips, having high value), exports to a purchaser Mr. Y in Country B, for USD 10m.

2. Lets simplify and say Mr. X-A exports to Mr. Y-B, without charging VAT, as export is tax exempt. Hence Mr. Y-B doesn’t pay any tax on the import.

3. Y-B sells to another customer Mr. Z-B, after charging 10% VAT. VAT is therefore $1m. However Mr. Y-B doesn’t pay $1m VAT to the government.

4. Z-B further sells to a person Mr. K-B for $12m, charging VAT @ 10% i.e $1.2m., and pays tax to government after setting off his input credit of $1m. So he pays only $ 200,000 to the govt.

5. This goes on a number of times in the Jurisdiction of country B, wherein each link in the chain deposits tax for his value addition only.

6. The goods are then re-exported back to country A by the last link in the chain, who not only exports goods zero rated, but also gets refund of input tax credit.

7. The process starts over like a carousel.

8. Y-B keeps on accumulating the tax payable but doesn’t deposit until the day when the authorities notice it.

9. Y absconds with millions of dollars of output tax collected from his customers, which was payable to Government.

10. Y is THE MISSING TRADER INTRA-COMMUNITY (MTIC). Rest of the links in the elongated chain are called “Buffers”, intended to blur the evasion, although some nodes in the chain might as well be unsuspecting honest traders.

Before this menace was discovered, loss of billions of dollars was caused to the EU. According to a study conducted by the European Commission in 2006, The UK was the biggest loser (Euro 12.50 billion) followed by Spain and Italy, who lost over Euro 2B each. As per estimate, the EU lost between Euro 25-100 Billion due to this fraud annually.

The advent of RCM concept:-

This humungous loss caused by such MTIC frauds, prompted the EU Tax Authorities, in 1993, to respond with an equally simple and ingenious concept of Reverse Charge Taxation, which casted the responsibility on the “receiver” of goods (i.e. the Importer) to charge and deposit tax with the authorities, rather than the conventional supplier/vendor of goods.

Under this new RCM (Reverse Charge Mechanism) taxation, the tax was to be deposited, by the importer himself, with the Customs Authorities, before goods release, thus compelling the importer to comply with the law in order to get a set-off of the tax so paid by him under the RCM mechanism, at the first point itself.

missing trader fraud


MTIC explained by the Dutch Government

Hence RCM was and has been fairly successful in curbing the menace of MTIC in cross border transactions.

Domestic Reverse Charge Scenario:

Similar to this, Tax regimes also imposed Domestic Reverse Charge to curb the menace of Missing trader in domestic market, especially in case of small vendors or some category of vendors where the risk of absconding and non-traceability is substantial.

In such mechanism, there is a similar compulsory reverse charge liability upon the Customer or the receiver of goods/services, while the vendor may be either registered or non-registered under the VAT/GST system.

The rationale behind this approach is simple- “it is easier to catch big fish”.

A small vendor is more difficult to catch but a bigger customer isn’t.

For e.g. UK has recently implemented RCM on construction material suppliers and contractors, w.e.f. 1st March 2021. Similar mechanism is already in place in the UK for mobile and microchips supply, drawing cues from the Carousel Fraud discussed above. The idea is same! It is very difficult to catch a small VAT defaulter, who choses not to pay in the collected VAT/GST to the exchequer. But since the establishment which receives such goods or services from various small vendors is comparatively easier to spot.

RCM in a sense is payment of VAT directly to the government, rather than routing the tax through the vendor. And it is impact-neutral to a scrupulous business, as it gets input tax credit for the RCM so paid, instantly.

Indian Context:

GST(Goods and Service Tax) law came into being on 1st July 2017 in India, although there were concepts of Modified Value Addition Tax(ModVAT) and Central Value Addition Tax(CenVAT) in the erstwhile Excise and Service Tax laws, as well as the concept of VAT under the subsumed Sales Tax Law since 2005. But the earlier mechanisms did not integrate with each other and hence were not extended from manufacture to sale in a cohesive manner.

So these mechanisms viz. Excise CenVAT and Sales VAT were toned down versions of a Federal VAT, which did not extend up to retail customer at many places, and also these two could not be set off with each other. This meant that a product was taxed twice in its life cycle- i.e. once when it was manufactured, and second time when it was sold.

Both these enactments were subsumed into an integrated GST law, taking cues from the international markets, to avoid cascading effect of tax and multiple taxation.

The concept of RCM existed in the previous regime of Excise law as well where the importer had to suffer the Countervailing Duty in lieu of Excise Duty(CVD), as if he were the manufacturer of the imported goods as well. But the credit of such CVD paid was also available to the importer, just like any domestic manufacturer.

This duty was also imposed for the sake of equity i.e. to make imports less lucrative and to place them at a level playing field with domestically produced goods. Also the credit of such CVD paid was also available to the importer, just like any domestic manufacturer.

So the RCM on imported goods served dual purpose of curbing the Carousel Fraud as well as ensuring domestic equity.

The concept was therefore carried forward in the GST law too.

We shall now briefly look at the various scenarios in Indian context and try to appreciate the purpose behind the tax structure.

RCM on :

a) Import of Goods:

Goods imported into India have to be taxed on RCM basis by the importer himself, as if he were the supplier too.

Interestingly, as was the case under previous regime, levy of GST on imported goods is imposed not under the IGST Act, 2017, but under the Customs Act, 1962 (Sec. 5 (1), proviso- IGST Act 2017). Customs Tariff Act was therefore amended suitably to accommodate this charge.

b) on Services

Unlike goods, Services are intangible and do not land on a Customs Station before being delivered to the customer. It is therefore difficult to tax such transactions.

> Import of Services, RCM on:

Import of Services is RCM taxed under the IGST Act only, unlike goods, which are taxed under the Customs Act, as discussed above. ( 10/2017-IT (Rate))

> Domestic RCM on Goods and Services:

RCM concept existed only under the previous Service Tax regime but was not levied on goods under Excise law.

GST makes an exception and brings both goods as well as services under RCM. Although there are very few goods (e.g. Cashew nuts, bidi leaves, silk yarn, raw cotton, lottery tickets- when sold to a registered person) are subject to RCM, several services find place under this provision.

There are two classes of Domestic Reverse Charge on services under GST law:

1. RCM depending upon whatthe service is – ‘Type of Service’ based RCM- one way criterion–  (NN 13/2017-CT (Rate) and 10/2017-IT (Rate))– S.9(3) CGST and S.5(3) IGST Act, 2017

2. RCM on supplies by Unregistered persons supplying specified services- two way check– suspended mostly, except for a few categories of recepients.- S.9(4) CGST and S.5(4) IGST Act, 2017.

Indian context, however hasn’t been very convincing in some instances, when it comes to RCM. We know that RCM was a device intended to be used mainly for tax absconders. But in India, RCM list contains Advocates too while other tax professionals viz. CA’s etc. are taxed on forward charge!

Also when Service Tax was proposed to be imposed on Transporters in 1997 and then in 2004, it was met with, in both instances, stiff push-back by the Transporters Lobby in the form of Nation-wide strike

These provisions are in contrast with the international scenario where law practitioners are taxed on forward charge basis.


To sum up, the article tries to briefly trace the history and rationale behind the concept of Reverse Charge Mechanism. The concept may be deployed judiciously by the Lawmakers, keeping in mind the curb it creates on the tax-evaders, while also considering the burden it entails on an enterprise.

Invoice based GST, as we have in India, is inherently a very burdensome and cost-intensive compliance and it steals a lot of professional time and energy. It leaves very little with a professional to contribute to other things in a corporate set-up! Things need to be eased up sooner, as much is expected of us all in these testing times than GST compliance.


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July 2024